US, European officials differ on economic recovery, inflation

The European Central Bank chief is cautious about the prospect of European and worldwide economic recovery while the Philadelphia Fed Bank President is more optimistic about the US economy.

ECB President Jean-Claude Trichet said in a press conference today that he is not overly concerned about inflation because of uncertain and uneven economic recovery.

European unemployment is projected to increase and price to remain stable. Short term inflation is projected to remain around 1% and medium term inflation at 2%, in line with the ECB's inflation target.

Trichet expects the ECB to continue to give credit support to banks, while closely monitoring the economy for signs of recovery.

Philadelphia Fed President Charles Plosser expressed concerns in a speech on January 12 about inflation rising to unacceptable levels. He urged an appropriate exit strategy to withdraw the massive liquidity that the government has injected into the economy since the financial crisis began. A failure to do so in a timely manner could potentially lead to a surge in inflation, he said.

Plosser is optimistic about the U.S. economic recovery. He expects the real GDP growth figure for the fourth quarter of 2009 to be significantly stronger than the third quarter. A rising manufacturing sector and the possible bottoming of the housing sector are encouraging signs of an economic recovery. The evidence for sustainability of the recovery is increasingly broad-based, he said.

According to Plosser, the toughest challenges of the Federal Reserve will be to find an appropriate exit strategy in order tonormalize policy, shrink our balance sheet, and return interest rates to a more normal level consistent with our longer-term objectives.